Planning for 2014 and Beyond

A&E MARKET OUTLOOK SURVEY

S E R

S T L U

SPONSORS

Grassi & Co. and Zetlin & De Chiara would like to express special thanks to the A&E Market Outlook Survey sponsors.

American Council of Engineering Companies of New York 8 West 38th Street, New York, NY 10018 www.acecny.org

Construction Management Association of America Metro NY/NJ Chapter www.cmaanet.org

American Institute of Architects New York State Chapter 50 State Street, 5th Floor, Albany, NY 12207 www.aianys.org

2014 A&E Market Outlook Survey . Results

Grassi & Co. and Zetlin & De Chiara LLP are pleased to announce the release of our 2014 Architecture & Engineering (A&E) Market Outlook Survey Results Report. The goal of the Survey, which was conducted in January-February 2014, 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 York area. The responses collected from the Survey identified valuable metrics, new and emerging trends and industry insights that will help A&E firms navigate through 2014 and beyond. Read on to learn more about the trends and results of the survey. If you have any questions regarding the survey or the content of this report, please feel free to contact us.

Sincerely,

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

Michael J. Vardaro, LEED AP Managing Partner Zetlin & De Chiara LLP mvardaro@zdlaw.com (212) 682-6800

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

2014 A&E Market Outlook Survey . Results

2014 A&E Market Outlook Survey . Results

Table of Contents
2014 A&E Market Outlook Survey Overview 6

Results Snapshot 7 General Firm Overview 8 Financial 12 Operations 16 Technology 18 Human Resources 20 Legal and Risk 24 The Future 26 Trends We See 30 Survey Advisory Board 32 Leaders in Serving the A&E Industry 34

2014 A&E Market Outlook Survey . Results

2014 A&E Market Outlook Survey Overview

Architecture & Engineering (A&E) firms are constantly looking for market intelligence tools and resources to assist in developing their business objectives and strategies. For a second year, Grassi & Co. and Zetlin & De Chiara LLP joined forces to conduct an A&E Industry survey of companies based in the New York regional area 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 2014 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 61 questions categorized into the following areas of study: 1. General Firm Overview 2. Financial 3. Operations 4. Technology 5. Human Resources 6. Legal and Risk 7. The Future

2014 A&E Market Outlook Survey . Results

Results Snapshot
Industry executives are becoming more optimistic about growth, with expected increases in revenue, gross margins and headcount for 2014.

KEY DATA POINTS 77% of the executives surveyed reported that their revenues are expected to be higher in 2014 than they were in 2013 (which is higher than the 71% of executives that reported higher expectations in last years survey results). A small number (6%) reported they expect their revenues to decrease in 2014 from 2013, which is lower than the 10% in last years results. The Residential market was selected by the executives as having the most potential for growth in 2014, followed by the Healthcare and Commercial market segments. 26% of respondents reported >10% organic revenue growth in 2013. 43% of executives surveyed indicated that obtaining credit from a bank is more difficult than previous years. While being somewhat high, this response reveals some sentiment of easing from just one year ago when 53% indicated difficulty in obtaining credit. More than 75% of respondents said they expect their headcount to increase in 2014, specifically at the professional and general administrative levels. 48% of all firms reported having a greater than 5% turnover rate in 2013, which is slightly lower than the results of the 2012 survey. More firms are planning to expand their business offerings and geographical reach as well as considering a merger and/or acquisition as part of their business strategy over the next 12 months compared to the previous 12 months. Fewer firms are planning to stay the course over the next 12 months, as compared to the last 12 months. A significant number of the respondents indicated that their top business goals for the next year include increasing profitability and growth, which is consistent with the top goals recorded in last years survey results.

2014 A&E Market Outlook Survey . Results

General Firm Overview

Overview of Respondents. Of the executives surveyed, the majority of the respondents (more than 80%) held the title of Partner/Owner.
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Partner / Owner CFO (Chief Financial COO (Chief Chief Legal Officer / Officer) / Controller Operating Officer) General Counsel / Risk Manager Other (Please specify)

Of the firms that are represented in the survey results, 55% are Architecture firms, 22% are Engineering firms and 23% operate an A&E firm.

Architecture & Engineering 23% Architecture 55%

Engineering 22%

When asked if their corporate organization consists of multiple companies with varying ownership to comply with licensing regulations, 61% of the Engineering firms, 11% of Architecture firms and 21% of A&E firms answered yes.

2014 A&E Market Outlook Survey . Results

General Firm Overview

Geographical Focus. 80% of the respondents reported that 76 -100% of the work performed by their firms occurs in the United States, compared to 91% in the 2013 survey. Of the respondents who indicated that their firms perform work internationally, the majority indicated that international work accounts for 1 - 25% of their business. Of the firms that perform work internationally, they do so in a variety of jurisdictions, including Canada, South America, Asia and Europe.

International Regions Where Firms are Working

Architecture Engineering A&E

33% 33%

33% 33%

33%

33%

25% 23%

27%

25%

25%

21%

20%

15%

15% 13% 10% 8% 7% 0%

3%

Canada

South America

Asia

Middle East

Europe

Africa

Australia

2014 A&E Market Outlook Survey . Results

General Firm Overview

Strategy. More than 30% of the survey respondents reported that the primary business strategies they implemented over the past 12 months were expansion of business offerings and geographical reach. Surprisingly, 25% of the respondents indicated that they did not implement any new strategies over the past year.

Business Strategies Implemented

40% 35% 30% 25% 20% 15% 10% 5% 0%

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2014 A&E Market Outlook Survey . Results

Financial
Net Revenues. More than 85% of the Architecture firms surveyed reported net revenue of $10 million or less, while more than 40% of the Engineering firms surveyed reported net revenue of $11 - $50 million. Among the A&E firms surveyed, net revenue varied with more than 40% of the firms reporting $10 million or less in revenue and more than 20% reporting revenue >$100 million.

2013 Net Revenue

Engineering 91% Architecture A&E

50% 28%

44% 17% 0% $51 - $100M 21% 2% > $100M

7% $10M or less

14%

14%

11%

$11 - $50M

Organic Revenue Growth in 2013. When combining results, 43% of firms had an increase of 6% or greater and more than a 1/3 of all firms saw an increase in organic revenue of 0 - 5%. However, 23% of the firms reported negative organic revenue growth for 2013. When breaking out the results, approximately 27% of Architecture firms as well as A&E firms reported negative organic revenue growth, but only 6% of Engineering firms reported negative growth. In fact, almost 40% of the Engineering firms surveyed reported >10% organic revenue growth in 2013.

2013 Organic Revenue Growth

> 10% 26% < 0% 23%

6 - 10% 17%

0 - 5% 34%

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2014 A&E Market Outlook Survey . Results

Financial
Organic Revenue Growth by Sector. When broken down by customer sector, 79% of the executives reported positive growth in the U.S. private sector; however, in the U.S. public sector only 55% reported positive growth. Similarly, international private sector growth was stronger than international public sector growth, but a majority of the executives reported negative growth in both sectors.

Organic Revenue Growth by Sector

Public - US 75% Private - US Public - International Private - International

53% 45% 35% 37% 23% 11% 3% > 10%

21%

18%

21% 8%

19% 7%

19%

5% 6 - 10%

< 0%

0 - 5%

Revenue Growth by Industry. Commercial, residential and retail sectors came out on top as a larger percentage of executives reported positive growth in these industry sectors in 2013. More than 50% of the executives reported that their revenue growth in the Government, Hospitality, Healthcare and Education industry sectors was negative in 2013.

Supporting graph on next page

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2014 A&E Market Outlook Survey . Results

Financial
Revenue Growth by Industry
< 0% 0 - 5% 6 - 10% > 10% 73% 65% 59% 51% 42% 50% 41% 41% 44% 37% 36% 61% 56% 53% 64%

26% 14% 7%

27%

22% 14%

24% 20%

23% 12% 15% 2% 11% 8% 14%

12%

0% Other

Other Hospitality Government *Other category includes industrial, transportation, historic preservation and emergency response industry sectors.

Healthcare

Education

Commercial

Residential

Retail

Financial Management Tools. As would be expected, a majority of the respondents indicated that they use financial management tools to manage their business. When asked which tools they consider most important, the responses revealed the following: 44% of Architecture executives reported cash flow projections as their most important financial management tool, and 16% reported audited/reviewed financial statements as their least important financial management tool. 47% of Engineering executives expressed that internally prepared financial statements were their most important financial management tool, and 17% expressed that management dashboards were their least important financial management tool. 36% of A&E executives indicated that management dashboards are their most important financial management tool, and 20% indicated that internal job/WIP schedules are their least important financial management tool. Financial Software and Information Sharing. With regards to accounting/financial software, 41% of the respondents reported using Deltek and 36% reported using Quickbooks. Additional software utilized by the respondents include BST, Axium and ClearView.

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2014 A&E Market Outlook Survey . Results

Financial
When asked how they share information with their project management teams: 44% of Architecture executives reported using written reports and 31% reported that they share information through meetings and discussions. 39% of Engineering executives reported using written reports and/or online tools. 33% of A&E executives reported using management portals or dashboards. Financing and Credit. 43% of executives surveyed indicated that obtaining credit from a bank is more difficult than previous years (compared to 53% in last years survey). However, 16% indicated it is easier and 41% reported no change in difficulty over previous years.

Obtaining Credit from Bank

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Easier today More difficult today No change over previous years

Regarding total exposure (as a % of total credit available), 66% of Architecture executives, 72% of Engineering executives and 71% of A&E executives reported that their firms total exposure was between 1 - 25%. When asked about their overall debt capacity, 72% of Architecture executives and more than 90% Engineering and A&E Executives reported that their firms are underleveraged. When asked about personal guarantee requirements, more than 65% of Architecture only and Engineering only executives indicated that they are required to give personal guarantees, but 53% of A&E executives reported that they are not required to give personal guarantees.

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2014 A&E Market Outlook Survey . Results

Operations
Firm Management and Ownership Transition. 41% of the firms represented in this survey are managed by an individual and another 37% by a Management Committee. It is important to note that this varies depending on the type of firm. 60% of Architecture firms are managed by an individual, 61% of Engineering firms are managed by a Management Committee and 40% of A&E Firms are managed by a Board of Directors.

Firm Management

Individual 41%

Board of Directors 22%

Management Committee 37%

A majority of Architecture Firms (67%) do not have a transition plan, the majority of Engineering firms (72%) do have a transition plan and the A&E firms were evenly split. The mixed results regarding the implementation of a formal transition plan are supported by the respondents responses to the survey question regarding their firms stock divestiture policy. Surprisingly, over 60% of the executives in each segment reported that there is no mandatory stock divestiture age within their firms. Approximately 3/4 of the firms surveyed have identified the next generation of leaders/management. A larger percentage of Engineering and A&E firms (71% and 62% respectively) have identified the next generation of leaders as compared to Architecture firms, where only 31% of the firms surveyed have identified the next generation of leaders. When asked what are the key ownership transition issues facing the industry, the following represented the greatest percentage of responses: 1. Identifying Future Leaders 2. Funding Retirement Obligations 3. Affordability for New Shareholders

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2014 A&E Market Outlook Survey . Results

Operations
New Projects. When asked what are the primary sources used to obtain new work, the majority of the executives cited the following three sources as ones that generate the largest percentage of new work: 1. Repeat clients 2. Responding to RFPs 3. Recommendations by clients Design Build. When asked what percentage of their projects are design build, approximately 43% of all firms indicated that 0% of their projects were design build, while 42% indicated that 1-10% of their projects were design build. When broken down by type of firm, more than 2/3 of the Engineering and A&E firms indicated that 1 - 10% of their projects were design build, but only 22% of Architecture firms indicated this.

Percentage of Design Build Projects

45% 40% 35% 30% % of Firms 25% 20% 15% 10% 5% 0% 0% 1 - 10% 11 - 25% 26 - 50% > 50%

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2014 A&E Market Outlook Survey . Results

Technology
Use of Building Information Modeling (BIM). 25% of all firms use BIM on 1 - 25% of their projects, 18% use BIM on 26 - 50% of their projects, and only 10% use it on 51% or more of their projects.

Percentage of Projects that Incorporate BIM

50% 45% 40% 35%

% of Firms

30% 25% 20% 15% 10% 5% 0% 0% 1 - 25% 26 - 50% 51 - 75% 76 - 100%

Of the firms represented that have projects which incorporate BIM, 91% have indicated that BIM has improved their firms quality of services provided (slightly down from last years survey results), but 64% reported that it has decreased profitability (slightly higher than last years survey results).

BIM Affect on Firm

Risk
Decreased, 54% Increased, 46%

Quality of Services Provided

Decreased, 9% Increased, 91%

Profitability
Decreased, 64% Increased, 36%

When asked about methods that have been successful in incorporating BIM in their firms, 47% of the firms indicated in-house training as the most successful method, followed by hiring BIM trained staff (33%).

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2014 A&E Market Outlook Survey . Results

Technology
Budgeting for Technology. As expected, technology is very important to the majority of the firms and executives surveyed. When asked about percentage of the technology budget and what it goes towards, most firms indicted a diverse investment strategy and reported that only 1 - 20% of their technology budget goes to one specific area. However, the areas of investment that some executives reported as receiving more than 40% of their entire technology budget, include hardware (21%), design technology (16%) and additional software (12%). Project information management (PIM) spend came in last.

Technology Investments
0 - 20% 83% 73% 62% 54% 52% 43% 36% 27% 30% 13% 6% 5% 3% 15% 9% 2% 0% Project Information Management (PIM) 3% 21% 6% Training 16% 0% Hardware 5% 37% 21 - 40% 41 - 60% > 60%

Business technology & Design technology infrastructure (BIM & modeling integration)

Additional Software

When asked about which document management (paperless) system firms use, Autocad came out on top as the most used, followed by Newforma.

Document Management Systems

Other 16%

Newforma 16%

ADEPT 2% Archioffice 4% SharePoint 6% eBuilder 4% Projectwise 4% Contract Manager 2%

AutoCad 46%

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2014 A&E Market Outlook Survey . Results

Human Resources
Human Resources (HR) Programs. The responding firms have implemented a variety of HR programs, including those indicated in the chart below, with technical training being implemented by a majority of the firms, and performance management systems being implemented by the least number of firms. These results are very similar to the results in the 2013 Survey. Although technical training was most popular across all segments of the industry, participating Engineering Firms identified safety training as the most widely implemented program in the segment.

Human Resources Programs Implemented

80% 70% 60% 50% 40% 30% 20% 10% 0%

Pension plan

Management / Incentive Soft skills compensation training plan

Partner / Manager Retreats

Performance management system

Safety training

Human resource information system

Technical training

None of the above

In addition, executives reported on the effectiveness of implementing the following methods to help emerging professionals develop their potential, and in order of most effective to least they are: 1. 2. 3. 4. Training seminars (i.e. lunch and learns) (74%) Employee mentoring (67%) Paid membership in professional organizations (60%) Paid professional exam preparation (45%)

Healthcare and Benefits. Executives were also asked about healthcare and other employee benefits they have implemented and a majority indicated that they have implemented higher deductible plans (54%), followed by 34% implementing Health Savings Accounts (HSAs). Just over a quarter of respondents reported that they have not implemented any of the benefits included in the following graph.

Supporting graph on next page

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2014 A&E Market Outlook Survey . Results

Human Resources

Healthcare and Benefits Programs Implemented

60% 50% 40% 30% 20% 10% 0%

Higher Deductible Plans

Self-Insurance

HSAs

Higher Employee Contributions

Wellness Programs

Medical Captives

No Insurance Coverage Provided

None of the above

The three most popular healthcare and benefits programs implemented amongst the Architecture firms included Higher Deductible Plans (43%), Higher Employee Contributions (23%) and HSAs (21%). However, the interesting thing about the responses in this segment were that 34% of the participating firms did not implement any of the programs listed in the above chart. Among the Engineering firms surveyed, the three most popular programs included Higher Deductible Plans (72%), HSAs (50%) and Wellness Programs (44%). The A&E firms reported their efforts in implementing similar programs, with most firms implemented Higher Deductible Plans (64%), HSAs (57%) and Higher Employee Contributions (36%). Turnover and Hiring. When asked about the turnover rate for 2013, 48% of all firms reported having a greater than 5% turnover rate, which is slightly lower compared to the 53% for 2012. However, the participating Architecture only segment was the only segment where some firms (21%) reported a turnover rate of >15%. When asked about factors that contributed to employee turnover, economic conditions were noted as the most common factor followed by lack of work/elimination of position. However, 3/4 of respondents indicated that they will be hiring in 2014, with a large majority (73%) expecting to hire at the professional level, followed by 17% hiring in general administrative functions.

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2014 A&E Market Outlook Survey . Results

Human Resources
Performance and Compensation. More than 65% of the executives in each segment have indicated that their firms set specific performance responsibilities and goals for all employees. However, when asked about performance reports provided to Partners and Mangers within their firms, 50% of the executives from the participating Architecture firms indicated that they do not use performance reports, but 59% of Engineering firms and 43% of A&E firms indicated that they use Profitability by Partner/Manager reports. When asked about increases in salaries, 69% of firms reported that they increased salaries in 2013. When broken out by segment, a significant number of Architecture firms (47%) reported that they did not increase salaries, while a majority of Engineering (83%) and A&E firms (86%) increased salaries by 1 - 6%.

Average Salary Increase in 2013

35% 30% 25% 20% 15% 10% 5% 0% 0% 1 - 3% 4 - 6% 7 - 10% > 10%

More than 3/4 of all firms surveyed reported giving bonuses for 2013, with a majority (51%) of the firms providing an average bonus of 1 - 6% of their employees salaries. However, almost 1/3 of the Architecture firms reported giving no bonuses, while a majority of Engineering and A&E firms did give employee bonuses, some of which were >10% (22% of Engineering firms and 14% of A&E firms reported that their average bonus was within this range). Bonuses were mostly noted as being tied to employee performance as well as company profits.

Average Bonus (as a % of Salary)

30% 25% 20% 15% 10% 5% 0% 0% 1 - 3% 4 - 6% 7 - 10% > 10%

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2014 A&E Market Outlook Survey . Results

Legal and Risk

Contractual Risk. Approximately half of the executives reported that their firms CFO/Partner/Owner assesses their contractual risk.

How Firms Assess Contractual Risk

Other 5% Corporate Counsel / Risk Manager 14%

CFO / Partner(s) / Owner(s) 49%

Outside Counsel 32%

Liability Insurance Limits and Deductibles. When asked about professional liability insurance limits, more than half of the firms reported $0 - $2 million. However, a majority (83%) of those firms were Architecture firms. More than 2/3 of Engineering firms and 36% of A&E firms reported their limits at $3 - $9 million. An overwhelming majority of all firms (92%) do not plan on increasing their liability insurance limits. When asked about insurance deductibles, 80% of firms reported a deductible of $0 - $100,000.

Insurance Deductibles
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% $0 - $100,000 $100,001 $249,999 $250,000 $500,000 > $500,000

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2014 A&E Market Outlook Survey . Results

Legal and Risk

Limitation of Liability. 26% of executives reported that 76 - 100% of their contracts have limitations of liability, while 34% reported that only 1 - 25% have limitations of liability. When asked what limitation of liability is typically based on, 49% responded it is based on fees, 25% responded it is based on insurance, 20% responded it is based on a flat dollar amount and 6% base it on insurance plus dollar amount. This is a change from last years survey results, where 56% of respondents indicated they based it on insurance and 35% based it on fees.

Limitation of Liability
Flat dollar amount 20% Fees 49% Insurance 25%

Insurance plus dollar amount 6%

Legal Claims. Respondents were asked to indicate what they believe is the cause of legal claims brought against their firms regardless of their validity. 37% of the firms reported standard of care as the most likely cause, followed closely by expectations and communication.

Cause of Legal Claims

40% 35% 30% 25% 20% 15% 10% 5% 0% Communication Coordination Expectations Technology Standard of care

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2014 A&E Market Outlook Survey . Results

The Future
Growth Projections. A majority of the executives (77%) expect that their revenues will increase for 2014 as compared to 2013. A majority (57%) also expect that their gross margin percentages will increase in comparison to 2013, especially within the Architecture segment as more than 60% of Architecture firm executives expect their average gross margin percentage to increase over the previous year.

Revenue Growth Expectations for 2014

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
60% 50% 40% 30% 20% 10%

Average Gross Margin % Expectations for 2014

Will increase Will remain the Will decrease from 2013 same as 2013 from 2013

0%

Will increase from 2013

Will remain the Will decrease same as 2013 from 2013

The majority of respondents (92%) are projecting that their growth will be highest in the U.S. private sector for 2014, with 47% expecting growth of 6% or greater in this sector. 77% expect positive growth in the U.S. public sector, but only 20% expect growth of 6% or greater. A majority of the respondents (62%) indicated that, for their firms, the growth rate in the international public sector is expected to be negative. However, 61% of the respondents do expect to experience positive growth in the international private sector. When asked about largest growth opportunities based on geographic region, 90% of all respondents are expecting growth, for 2014, in the United States. Regarding international markets, 23% of all respondents are expecting growth in Asia and 17% are expecting growth in South America and the Middle East. However, given that a significant number of firms have reported making efforts to expand their geographical reach in the next 12 months, it is expected that international reach of the work performed by firms in the New York regional area will continue to increase over time.

Geographic Growth Opportunities

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

United States

Canada

South America

Asia

Middle East

Europe

Africa

Australia

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2014 A&E Market Outlook Survey . Results

The Future
When asked to rank market segments/industries based on expected growth in the coming year, the respondents selected Residential and Healthcare as the top two markets for growth. Markets with the least amount of growth expected included Municipal and Retail markets. Strategy and Business Goals. Similar to 2013, the primary business strategies the executives reported that they are considering in the next 12 months include expansion of business offerings, expansion of geographical reach and merger and acquisition (M&A) transactions. However, it appears that the pursuit of these strategies as well as others such as sale/divestitures and transfer of ownership to management are going to be more widespread throughout the industry than they were in the past 12 months. As the chart below illustrates, the number of executives looking to implement these business strategies in the next 12 months are significantly greater than the number that implemented them in the last 12 months, especially with regards to M&A activity. This increase in strategic activity reinforces the positive outlook in the market as more firms are continuing to make investments to grow and expand their businesses.

Business Strategies Next 12 Months vs. Past 12 Months

Transfer of ownership to management

Next 12 Months Past 12 Months

Expansion of geographical reach

Expansion of business offerings

Sale / Divestiture

Merger and / or Acquisition

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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2014 A&E Market Outlook Survey . Results

The Future
The primary business strategies discussed above directly correlate to the overall goals and objectives of firms in the New York regional area. Based on the responses from all respondents, the top two goals for firms in 2014 are profitability and growth. Additional priority objectives include productivity, controlling costs/overhead and hiring key staff.

Top Goals for 2014

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

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2014 A&E Market Outlook Survey . Results

Bringing your goals within reach

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2014 A&E Market Outlook Survey . Results

Trends We See
OPTIMISTIC OUTLOOK DRIVES INVESTMENTS IN KEY AREAS Firms are more optimistic about 2014 and potential opportunities to grow their businesses. Regardless of their segment, the majority of executive respondents indicated that they expect to see increases in their revenue as well as in their average gross margin percentages in 2014. This optimism is impacting investment activities of firms in the New York regional area, specifically with regards to their investments in training and hiring new employees. As firms continue to make efforts to achieve their goals of increasing profitability, growing their businesses and reducing their costs, their investments in talent and technology to improve efficiency and productivity will continue to increase. However, it is important for firms to keep a close eye on the marketplace as they look to grow their top line revenue. Making investments in bringing on new staff without an existing pipeline of work is an investment in future growth which requires detailed analysis in order to understand proper timing and how much staffing is sufficient. Creating models to determine the correct level of staff for the amount of desired revenue and growth is suggested before firms increase headcount. 2014: THE YEAR OF M&A AND OWNERSHIP TRANSITION Although the expansion of business offerings and geographical reach are still primary business strategies for most Architecture, Engineering and A&E firms, there has been a significant increase in the number of firms that are exploring M&A transactions as a business strategy to achieve growth. It is likely that we will see more transactions across all segments (especially in the Architecture segment) in the coming 12 to 24 months. These transactions will be part of a firms long-term strategy to remain competitive and will complement their efforts to grow their business organically through enhanced offerings and expanded geographical reach. Given the fact that many firms in the New York regional area do not have a formal transition plan in place, it is encouraging to see that ownership transition to management is a business strategy that is being considered by more firms in the next 12 months. Successful transition and succession planning is a challenging process that takes proper planning as it is constantly evolving over time. As more firms explore this strategy, we will begin to see changes with regards to stock divestiture policies as well as internal training and hiring practices as firms will be required to confront the most common challenges that have prevented their efforts in this area to date. Establishing and implementing set policies is essential in order to ensure successful succession and transition through multiple generations. As firms explore M&A and ownership transition as a means for growth, they will need to retain good/ top level management. In order to do this effectively, firms should consider implementing (or updating) employee incentive programssuch as new deferred compensation plans and bonus plans that are tied to the growth and profit of the firm. These plans will not only help firms retain good talent, but will also help them maintain profitability as their firms change.

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2014 A&E Market Outlook Survey . Results

Trends We See
INTERNATIONAL WORK INCREASES BUT GROWTH STILL IN QUESTION As the survey results above indicated, fewer firms reported that 76 -100% of their work was performed domestically compared to last year. However, a majority of firms indicated that their revenue growth in both the international private and public Sectors was negative. As international markets continue to improve, it is expected that more growth opportunities, especially in jurisdictions such as Asia, South America and the Middle East, will become available for local New York regional firms. Exploring foreign markets is an important strategy for local Architecture, Engineering and A&E firms as they continue to grow; however, it is essential for firms to have the correct policies and procedures in place before committing to do work in international markets. Expansion into foreign countries equates to expansion of risk. Firms that are pursuing global opportunities need to understand the operating procedures of the countries they are exploring in order to reduce their exposure. Educating firm managementthrough speaking with other firms already working in the markets and/or meeting with the firms advisors, accountants, lawyers, and banking partners to discuss the cultural and legal issues prior to foreign project engagementwill help ensure that the firm understands the pitfalls and start-up procedures of operating internationally. U.S. PRIVATE SECTOR IS LEADING SOURCE OF GROWTH FOR NEW YORK REGIONAL FIRMS With a majority of industry executives reporting the most revenue growth in the commercial, residential and retail sectors as well as negative growth in the government and education sectors, it is likely that the U.S. private sector will continue to be the leading source of growth in 2014. As the U.S. economy continues to improve, the opportunities within the private sector will continue to increase, resulting in continued growth for local firms. CREDIT MARKETS ARE OPENING UP IN THE INDUSTRY Although a significant number of firms have reported that obtaining credit from a bank is still more difficult than it has been in previous years, it appears that the constraints have begun to loosen in 2013. This trend is expected to increase in 2014 as most firms current exposure is quite low (between 1 - 25%), thus making them prime candidates for bank financing. Additionally, given the fact that a majority of New York regional firms are currently underleveraged, obtaining credit from a bank to finance their operations and strategic initiatives, including M&A activity, could help firms implement their business strategies in the near term. As firms look to bank financing as a source of capital, they will need to make sure that their financial statements are in order as increased credit may require a higher level of assurance, such as an audited financial statement. Additionally, firms need to understand the ever changing accounting rules and the impact they will have. For example, pending accounting changes, such as revenue recognition and private company accounting rules, will impact a firms financial statement and will have to be considered. Meeting with financial experts and banking partners on a regular basis to discuss operations and financial results will help keep firms ahead of these changes so they are meeting the requirements of the market.

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Survey Advisory Board
In order to ensure that the 2014 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. Milo Riverso President & CEO STV Group, Inc.

Paul Bello Owner AKF Group, LLC

Peter Catalano Chief Financial Officer Kohn Pedersen Fox Associates PC

Jay Simson President ACEC New York

Eric Goshow Owner Goshow Architects LLP

Joseph Tortorella President Robert Silman Associates

Paul Grosser President P.W. Grosser

Vincent Zerilli Vice President JPMorgan Chase

Grassi & Co. and Zetlin & De Chiara 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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2014 A&E Market Outlook Survey . Results

Dont let time slip away...

take the necessary steps to secure your future

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. Results Leaders in Serving the A&E Industry 2014 A&E Market Outlook Survey
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. Commitment to the Architecture and Engineering Industry With a strong growth record over the past decade, Grassi & Co. offers its architecture and engineering clients a multidisciplinary range of services, including: Audit and Attest Tax Compliance and Consulting Construction Cost Audit and Consulting CFO Advisory and Accounting Management Business Advisory Forensic, Litigation Support and Valuations Technology Consulting The single most important factor of our firms success has been our dedication to knowing the industries which we serve. Now, more than ever, A&E entities are closely scrutinized, held accountable, and under the proverbial microscope. Our team works closely with our clients within the A&E Industry to increase their overall efficiency, while minimizing their challenges and enhancing their 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 its 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. 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.

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. Results Leaders in Serving the A&E Industry 2014 A&E Market Outlook Survey
About Zetlin & De Chiara LLP
Zetlin & De Chiara LLP is a leading national construction law firm committed to providing sophisticated and innovative legal and business advisory services related to real estate, design, and construction for a wide spectrum of industries. We provide comprehensive counsel throughout the planning, design and construction process, from drafting and negotiating contracts to outlining risk management strategies. We have extensive experience representing clients in litigation and alternative dispute resolution, and also advise on business formation, licensing and corporate issues. Our Clients Our firm represents leading commercial and residential developers and property owners, architects, engineers and other design professionals, construction managers and contractors, insurance carriers and financial institutions. Our Attorneys Our attorneys include individuals with in-house construction counsel experience, degrees in the design professions, and LEED accreditation. Our Services Zetlin & De Chiara is committed to enhancing the landscape of our communities by partnering with our clients and helping to bring projects to life. Our firm has been on the forefront of new approaches, solutions and models for advancing the construction process for clients. Our services include: Contract Negotiation & Preparation Litigation & Alternative Dispute Resolution Risk Management Corporate Law Employment Law International Projects Professional Licensing Intellectual Property & Emerging Technology We advise clients on the benefits and challenges of new technologies and alternative construction delivery methods: Design Build Public-Private Partnerships (P3s) Project Labor Agreements (PLAs) Building Information Modeling (BIM) Integrated Project Delivery (IPD)

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ACCOUNTANTS & SUCCESS CONSULTANTS

488 Madison Avenue New York, NY 10022 212.661.6166 www.grassicpas.com

50 Jericho Quadrangle Suite 200 Jericho, NY 11753 516.256.3500

801 2nd Avenue New York, NY 10017 212.682.6800 www.zdlaw.com

80 Bloomfield Avenue Caldwell, NJ 07006 973.364.9900

Six Landmark Square 4th Floor Stamford, CT 06905 203.359.5733