Week 01 Prelims.pdf

AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS Specific Learning Objectives: 1. Identify basic concepts of Economic Cycles in the practice of Architecture. NAVIGATING ECONOMIC CYCLES Kermit Baker, Ph.D., Hon. AIA Architects serve an extremely cyclical s...

AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS Specific Learning Objectives: 1. Identify basic concepts of Economic Cycles in the practice of Architecture. NAVIGATING ECONOMIC CYCLES Kermit Baker, Ph.D., Hon. AIA Architects serve an extremely cyclical sector of our economy. To thrive, therefore, they need to be able to adjust to the regular ups and downs of the construction industry. THE IMPORTANCE OF UNDERSTANDING ECONOMIC CYCLES Whether architects like it or not, they are extremely exposed to economic cycles. Since architects receive most of their revenue from services provided to the construction sector of the economy, and since the construction industry is one of the most cyclical industries in the economy, architects are vulnerable to the regular ebb and flow of activity in the economy. The impact of the economy on architecture practice has been particularly apparent with recent cycles. The past national economic expansion that began in late 2001 reached a peak at the end of 2007. The tail end of that expansion saw healthy growth in the economy, and with it even stronger growth in most nonresidential construction sectors. However, at this phase of the upturn, the overall construction sector was seeing more modest growth. The housing market peaked much earlier in the cycle-the beginning of 2006 was the high-water mark of the cycle for home building-and declines after that offset gains in the nonresidential construction sector over the 2006-2008 period. Once the downturn hit in early 2008, the construction sector of the economy experienced steep declines. And even though over all economic output began recovering nationally by the middle of 2009, construction activity continued to spiral downward. Total construction spending levels, which exceeded $1 trillion in 2008, fell to under $800 billion by 2011. With less construction came less building design. In addition, there were efforts by owners and developers to more aggressively manage design and construction costs of the projects that were built, creating pressure on design fees and construction bids. As a result, gross revenue at architecture firms declined from over $44 billion in 2008 to $26 billion by 2011, a 40 percent decline over this three-year period (Figure 7.1). This decline in revenue was also felt in employment-in the economy, in the broader construction sector, and at architecture firms. Such a significant reduction in firm revenue produced a comparable reduction in employment. Nationally, the decline in overall business payrolls throughout the economy over this period was one of the steepest since the Great Depression. From its high in early 2008 to its low in early 2010, almost 8.8 million payroll positions, or 6.4 percent of the workforce, disappeared. However, by the end of 2011, over a third of these losses had been recovered. Construction, being a more cyclical sector of the economy, saw even steeper losses proportionately. Construction payrolls peaked in early 2007 due to the housing downturn, and steadily declined through midyear 2011. Since that time, there has been hardly any recovery. Between 2007 and 2011, payrolls in this industry declined by over 2.1 million-almost 28 percent-double the number of construction positions added during the 2003–2007 upturn. Positions at architecture firms have generally followed the path of the broader construction industry. Due to the heavy reliance of architecture firm revenue on non-residential construction activity, payroll positions continued to grow through midyear 2008. They then dropped sharply through early 2011, and have hardly recovered since that point. Between 2007 and 2011, over 28 percent of positions at architecture firms disappeared, a share that greatly exceeded the gains during the prior upturn (Figure 7.2). This dramatic upheaval at architecture firms has had dramatic implications on professional practice. One change is the mix of projects at firms. Surveys of architecture firm activity over the past decade show that there has been considerable fluctuation in the share of project activity across the major construction sectors. Residential projects tend to increase early in a cycle, commercial/industrial projects in mid-cycle, and institutional projects later in the cycle. Billings for residential projects averaged 14% of total firm billings over this past decade, commercial/industrial 27%, institutional 53%, with the remaining 6% divided between other construction and non-construction activities. By 2011, residential billings had returned to their decade average, having grown to 18% in 2005 during the peak of the housing market, and fallen to 11% in 2008 as the housing market was crashing while the non-residential construction sector was just beginning to peak. Week 01 Prelims Page 1 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS Even though housing remained relatively weak through 2011, multifamily activity-a critical residential sector for architecture firms-was building momentum, and was a growing share of design activity for residential projects. Commercial/industrial design activity tends to be extremely volatile over the cycle. Activity fell off sharply with the overall economic downturn, and was still near its bottom in 2011. As a result, the share of design billings from this sector was below its decade average that year. Institutional activity tends to be more stable over the cycle. This means that shares are generally a bit lower during upturns and higher during downturns. By 2011, the institutional share was near its decade high, mostly because other sectors had fallen off more dramatically (Figure 7.3). The overall decline in project activity during the downturn, coupled with the changing mix of projects, produced an expansion of services that the typical firm offered to its clients. During upturns, larger firms typically continue to offer a full range of design services to clients, while smaller firms often niche their services in a smaller number of specialties. During downturns, firms of all sizes tend to investigate new areas in the process of looking for new work. So, even though firms had fewer employees on average in 2011 than during the boom years, higher shares responded that they offered such services as sustainable design, planning, interior design, and space planning than in prior years. A related secular trend is that a growing share of firms categorizes themselves as multiple-discipline design firms, up almost 10 percentage points over the past decade. The share of payroll positions lost during this downturn has been proportionately greater than the share of architecture firms closed. As a result, architecture firms have shrunk: The average number of payroll employees at a typical firm declined from 10.3 in 2008 to 8.8 in 2011. Currently, according to AIA estimates, almost a quarter of architecture firms nationally are sole practitioners, and over 60 percent have fewer than 5 employees on their payrolls. In contrast, only 1.4 percent of offices have 100 or more employees. In 2008, 51 percent of firm offices had fewer than 5 employees, while 2 percent had 100 or more. Even though firm counts are heavily weighted toward smaller businesses, a large share of design professionals works in a larger- firm environment. Firm locations with 100 or more employees account for over 20% of all staff at architecture firms nationally, and 50+ person firms account for over a third of all employment. Since revenue per employee tends to be higher at larger firms, 100+ person firms account for over one-quarter of professional fees generated nationally, while 50+ person firms account for well over 40%. Net revenue per employee averages almost twice as much at larger firms than it does at smaller firms, in part reflecting the greater use of part-time staff at smaller firms, but also likely reflecting higher chargeability rates at larger firms, as well as higher levels of staff productivity due to generally greater levels of capital investments (Figure 7.4). Like previous recessions, this downturn has produced greater fragmentation at architecture firms. Firm layoffs have pushed down average firm sizes, and unemployed architects are a common source of new start-ups. Due to the ongoing “feast or famine” in project revenue for architecture firms, there are unusually high shares of start-ups and failures in the profession, reflected in the low average age of firms. According to The Business of Architecture: 2012 AIA Survey Report on Firm Characteristics, over a third of firms nationally were founded since 2000, and 60 percent were founded since the last significant downturn in the profession in 1990. Only 10 percent of firms at present were in existence prior to 1970. In an era where access to credit is very difficult (particularly for businesses without a long track record), where repeat clients and established institutional relationships are important sources of new project activity, and where staff development (including formal intern development programs) extends for many years, high levels of staff turnover and business failures can have a devastating long-term effect on the profession. The general downsizing of firms has also produced a change in their staff composition. In the AIA Business of Architecture 2009 report (reflecting staff composition at the beginning of that year), 60 percent of payroll positions were architecture positions (in cluding interns and students), 21 percent were other design professionals- with engineers and interior designers accounting for the largest shares-while Week 01 Prelims Page 2 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS the remaining 19 percent were technical and support staff. By the beginning of 2012, there were some significant changes to this composition. The largest share of losses was among the technical and nontechnical staff, positions that generally were not directly billable on projects. Architecture staff positions increased their share somewhat over this period, while the share of other design professionals remained essentially unchanged. FIGURE 7.4 Even with Benefits to Scale in the Profession, Most Architecture FIGURE 7.5 A Significant Share of Downsized Workers are Not Likely to Return Firms Remain Small to Profession after Great Recession These summaries of payroll staff composition may somewhat overstate the actual changes in staff composition that occurred over this period. Many firms replaced or converted payroll positions to contract positions. Contract positions generally don’t offer benefits and typically limit the number of hours worked to the immediate project needs. In other cases, full-time workers were cut back to part-time, or full-time positions were replaced with part-time positions. Many of these part-time and contract positions may be converted to full- time when workloads recover. Regardless, many architecture positions were lost during the Great Recession beginning in early 2008, and many occupying thes e positions may never return to practice architecture. A survey conducted by the AIA in late 2011 asked architects their sense of what had happened to full-time architectural staff that had been downsized during the recession, and to speculate what would likely happen to these former employees in the future. Their sense was that about 30 percent of these former employees were still working at architecture firms on a part-time or contract basis, about 30 percent were working outside the profession, and the remaining 40 percent were not employed as of that point, including some who had retired or had returned for additional schooling. Looking to the future, this group estimated that about 40 percent of these downsized workers would never return to architecture practice (Figure 7.5). UNDERSTANDING AND INTERPRETING ECONOMIC CYCLES The business cycle comprises the up-and-down movements in activity in an economy. It generally is not a regular, predictable, or repeating phenomenon, and is commonly identified as a sequence of four phases with four distinctive points that serve as metrics for defining them (Figure 7.6): Early expansion: The period of acceleration in the pace of economic activity. This is the phase in the cycle when the economy is recovering from the last downturn and expanding into a period of new growth. Peak growth: The point where the rate of growth reaches its high point for that cycle. Late expansion: After the economy reaches a point of peak growth, growth begins to slow. Market peak: The time when actual economic output (not the rate of growth) is at its peak for that cycle. Early contraction: The phase immediately after the market peak when the slow growth transitions to a period of accelerating decline. Peak decline: The lower turning point of a business cycle, where the rate of decline is at its steepest. Late contraction: The period when the pace of decline begins to slow. Market trough: The time when economic output is at its lowest point for that cycle. All industries are subject to business cycles, but some are more influenced by them than others. Consumer staples such as food and clothing or inexpensive consumer products tend to have fairly stable levels of activity across the business cycle. They are less influenced by changes in consumer income, or concern about future earnings. Industries that rely on major expenditures (e.g., cars and homes) or involve large investments (e.g., buildings and public wo rks projects) tend to have more pronounced business cycles. Households and businesses tend to put off these purchases if they are concerned about business conditions and move ahead with them with, they are more comfortable with the economic outlook. This often creates a boom or bust in the production of these products, which contributes to the development of business cycles. Week 01 Prelims Page 3 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS The construction industry is one of the most cyclical sectors in the economy. When economic conditions are unfavorable to some industries, they are often unfavorable to others, so fewer construction projects are undertaken. Conversely, when conditions are favorable to some, they are likely to be favorable to others, so a lot of projects that may have been on hold for a while are undertaken. FIGURE 7.6 Phases of the Business Cycle FIGURE 7.7 Most Years, Nonresidential Construction Sees Either Strong Growth or Strong Declines This pattern is easy to observe when looking at the change in construction activity over the past several decades. As shown in Figure 7.7, changes in the levels of construction activity from McGraw-Hill Construction data show the major cyclical upturns and downturns over the past several decades. There was a strong upturn in the early to mid-1980s, in part generated by tax code changes that encouraged business investment, including investment in structures. This period of healthy growth was followed by a fairly significant downturn in the early 1990s brought on in part by the collapse of the savings and loan system in the country. With weakness in these institutions, there were problems with financing residential and nonresidential construction, as well as with long-term loans to finance their acquisition. The mid-1990s ushered in an extended period of strong growth in construction activity. A technology boom helped moderate the rate of inflation yet produce strong job growth, which provided a supportive economic environment for construction activity. As a result, there were eight straight years of gains in nonresidential construction activity, four of them at a double-digit pace. The 2001 to 2003 construction downturn that resulted from the bursting of the tech bubble was fairly mild, particularly in comparison with the magnitude of the preceding upturn. Coming out of the early 2000s downturn was a fairly modest construction upturn from 2004 through 2007. No year over this period saw construction activity increase at a double-digit pace. The downturn following such a modest upturn would also be expected to be fairly restrained. Instead, with the rapid decline in house prices nationally, there was a near meltdown of the international financial system that produced the worst economic downturn since the 1930s Great Depression. It’s fair to assume that had the nonresidential construction markets been more overbuilt leading into the downturn, the Great Recession would have been even more dire for th e nonresidential construction industry. This review of recent cycles in nonresidential construction activity underscores one of the critical challenges for architecture firms: namely the chronic volatility in project activity in the profession, typically producing very uneven revenue streams. Since changes in construction activity can be assumed to generate comparable changes in design activity at architecture firms, it’s no surprise that managing an architecture firm is a terribly challenging undertaking. Looking over the 31 years of construction activity from 1980 through 2011, there are three major expansions and at least parts of four major contractions. Architecture firms are constantly managing through changes in business conditions, changes that create a number of challenges. Declines in activity present obvious challenges: potential staffing reductions, overhead adjustments, increased marketing initiatives, and potential credit issues. These periods unfortunately are not rare. Over this 31-year period, there were 14 years where construction activity declined. Eight of these 14 yearly declines were 10 percent or greater, which present serious challenges for an architecture firm. However, there are also challenges during the years where construction activity was increasing. For almost a third of these growth years, construction activity increased by 10 percent or more. Such rapid growth presents challenges for firms in terms of hiring and training staff and meeting project deadlines. Such challenges may be more desirable than those associated with downturns, but they remain challenges nonetheless. Combining the two categories-years with declines and years with strong growth- indicates that almost two-thirds of the years over this 31-year period presented challenges for architecture firms. Thus, for any architecture firm, being in a period with distinct challenges is significantly more likely than being in a period without them (Figure 7.7). All of this points to the need for architecture firms to monitor business conditions closely, so that they can anticipate a movement in the business cycle and begin to implement adjustments in advance of conditions actually changing. Economic indicators to monitor business Week 01 Prelims Page 4 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS conditions should relate to the market area served by the firm; firms that serve a local market should monitor local indicators; regional firms should monitor regional indicators; and so forth. Some of the best economic indicators to monitor include the following: Employment. Changes in employment are probably the best single indicator of the economic health of an area. Job growth generates other forms of economic activity, including construction. Consumer confidence. How comfortable consumers are with the economic environment is critical to their willingness to spend, which in turn drives economic growth and construction activity. Financial indicators. Interest rates, lending standards, and the volume of construction and mortgage loans are key to determining whether an owner or developer will proceed on a construction project. Housing indicators. While directly important to many architects, the condition of the housing market is a key leading indicator for the broader economy as well as for the nonresidential construction sector. However, an economic indicator that is closely connected to an industry will provide more precise information on likely future trends for that industry. For that reason, in 1995 the American Institute of Architects launched a monthly survey of design activity at architecture firms, now known as the Architecture Billings Index (ABI), to track business conditions across the profession. Using the ABI to Anticipate and Interpret Cycles Beginning in late 1995, the AIA assembled a national panel of architecture firms to participate in an ongoing survey to measure their business conditions. The principal purpose was to develop a database of national and regional business trends at architectur e firms so that an individual firm would have a better sense of how business at that firm compared with its peers. Architects are well positioned to report on the direction of the construction industry. Although decisions to build a nonres idential structure are made by hundreds of thousands of private businesses, nonprofit institutions, and government agencies, the first comprehensive indication of planned development typically shows up on an architect’s drafting board. Surveys conducted by th e AIA of its member firms, and information from McGraw-Hill Construction, indicate that about 75 percent of nonresidential buildings are designed by architects. A greater share of nonresidential activity is reviewed and approved by architects, but without complete design involvement. The ABI survey is conducted monthly across a national panel of architecture firms. Currently, about 750 architecture firms actively participate in this program. Firms included in this survey provide architectural services as their principal design service offered. Firms may also provide engineering, interior design, landscape architecture, planning, urban design, or related services. Most firms additionally provide pre-design or construction-phase services (e.g., construction management) in addition to their architectural design services. Firms that participate in the survey also provide the AIA with information on key firm characteristics, such as annual billings, construction sectors served, and number of employees. On the first business day of each month, participating firms are e-mailed a link to an electronic questionnaire. That questionnaire asks respondents to report firm billings for the just-completed month as compared to the previous month, as well as inquiries for new work over the same period. If a firm doesn’t bill monthly, it is requested to estimate the work that will be billed for that period. Firms are asked to report whether billings during the previous month significantly increased (5 percent or more), remained about the same, or significantly decreased (5 percent or more). The ABI is computed as a diffusion index, with the monthly score calculated as the percentage of firms reporting a significant increase plus half the percentage of firms reporting no change. Comparisons are always to the previous month. Diffusion indexes, centered at a score of 50, are frequently used to measure change in economic activity. If an equal share of firms report an increase as report a decrease, the score for that month will be 50. A score above 50 indicates that firms in aggregate are reporting an increase in activity that month compared to the previous month, while a score below 50 indicates that firms are reporting a decrease in activity. Certain months of the year-December is typically one of them-are slower at architecture firms due to holidays, weather, and other factors. Other months may show almost uniformly stronger business conditions for just the opposite reasons. To allow for meaningful comparisons among months, the monthly responses are seasonally adjusted using the Census Bureau’s X-12 program. The seasonal adjustment process regulates the ABI score each month based on typical scores for that month in prior years. So, for example, even though December scores may be weaker than November scores, the seasonal adjustment process compares this weakness to prior years to determine if the decline is stronger or weaker than it has been previously. Since architecture firms design the overwhelming majority of nonresidential buildings in the United States, we would expect a relatively consistent relationship between architectural design activities and nonresidential building construction. However, this relationship does vary from project to project. A recent AIA survey of architecture firms determined that the average time between the award of a design contract and the award of a construction contract for that facility was about a year. However, there is considerable variation from project to project. According to the aforementioned survey, for commercial/industrial projects the design phase up through contract award was less than six months for 40 percent of the projects, while for more than a quarter of projects this period extended beyond a year. Size and complexity of a project are key reasons for variation in design time, but three other factors also influence design time. Client decision making-and whether these decisions need single or multiple approvals-frequently Week 01 Prelims Page 5 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS influences the length of the design phase. Financing and funding for the project also can be a factor. Finally, regulatory approvals-land entitlement, special use permits, zoning, environmental issues, and historical considerations-also influence the length of the design phase. The ABI is designed to mimic the business cycle for design activity. The ABI scores are centered on 50, so a score above 50 indicates an increase in design activity, and a score below indicates a decrease. During the early phase of a recovery, we would expect to see scores accelerate to the mid-50s to even 60 range. During the late expansion, scores would likely settle back to the low 50 range. Moving into a contraction, scores would likely drop quite quickly to the mid-to-low 40s, before heading back up to the upper 40s as the market moved into the late contraction phase. This allows the user to anticipate the direction that scores are moving, and therefore the future direction of design activity (Figure 7.8). IMPLICATIONS OF CYCLES ON THE FUTURE OF PRACTICE Economic cycles are the most powerful business force facing the architecture profession. Successful firms learn how to manage their practice through cycles to minimize the long-term negative impact. Traditionally, diversification has been a strategy to allow firms to achieve more stable revenue across cycles. Firm diversification may take on one or more of the following three dimensions: geographic, building type, or services. Geographic Diversification Most small and midsize architecture firms serve a fairly focused geographic area. Urban firms may serve an entire metropolitan area, or a portion of the metropolitan area. Others may focus their practice in a single town or county, or portion of a state. Typically, the economic base of the markets served is relatively homogeneous, meaning that the economic health of these markets rises or falls with the performance of a relatively small slice of the economy. Typically, the big industries in these areas, such as a college or university, a hospital, an insurance company, a manufacturing facility, a government installation, or something similar, will largely determine the health of the local economy. By serving a larger geographic area, a firm can broaden the economic base on which it is dependent. While one sector of the economy may be dealing with difficult issues, it is much less common for several sectors of the economy to be moving through the same stage of the economic cycle. Some firms have taken geographic diversification one step further, into international markets. Even though the world economy is much more interconnected now than it was in the past-analysts refer to the world being “flat”- pursuing international projects does typically offer diversification opportunities for firms. For example, annual economic growth in China has been averaging close to double digits for many years, whereas growth for many developed countries has averaged in the low single digits annually. Countries with stronger growth would be expected to have a more vibrant construction industry to support that growth, and therefore diversifying a practice to include projects in rapidly developing areas should help to hedge against a domestic slowdown. Building Type Diversification As with geographical areas served, most small and midsize firms focus their practice on a few building types, such as single-family homes, offices, hotels, schools, or medical facilities. Generally, building cycles for major construction sectors occur at different phases of the broader economic cycle. Housing cycles generally unfold early in an economic cycle, followed 12 to 18 months later by commercial/industrial cycles, followed in turn 6 to 9 months later by institutional cycles. The risks of concentrating a practice on a limited number of building types can be almost as great as geographical concentration; weakness in certain sectors of the economy can affect demand for some facilities more than others. High mortgage rates can limit demand for new homes. High energy costs can limit travel, and therefore demand for hotels. Diversification can provide design opportunities in a sector of the economy when another sector is weak. Service Diversification While most architecture firms offer standard architectural design services, fewer offer related design services or expanded design services. According to The Business of Architecture: 2012 AIA Survey Report on Firm Characteristics, only about one-half of architecture firms offered interior design, space planning, planning, or sustainable design services. About a quarter offered historic preservation, design-build, or construction management services. Fewer yet offered landscape architecture or engineering services. A broader service package generally opens up more design opportunities and allows a firm to compete for a broader range of projects. Also, a broader service package-or a concentration in more specialized services-allows a firm to partner with other firms on a broader Week 01 Prelims Page 6 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS range of projects. The historical concentration of architecture firms generally means that firms need to grow more than may be desirable during upturns, and go through a painful downsizing process during downturns. For example, between the beginning of 2009 and 2012, the AIA estimates that there was a net loss of about 6 percent of all AIA member- owned architecture firms nationally. While this marks a fairly significant decline in the number of firms, it marks an even more significant decline in the distribution of firms. The number of 100+ person firms declined by over 20 percent, while the number of other midsize and larger firms declined by more than 10 percent. Conversely, the number of sole practitioners increased, accounting for over a quarter of all firms (Figure 7.9). While most firms downsized during the construction downturn precipitated by the 2008-2009 Great Recession, others went out of business. Some architects who were laid off started their own practices. The net result is that some older firms ceased operations, while some new firms started up. This process reduces the age of the average architecture firm in the United States. By early 2012, well over a third of all architecture firms in the United States had been founded since 2000, and over 60 percent had been founded since 1990, according to The Business of Architecture: 2012 AIA Survey Report on Firm Characteristics. Only about one in five firms-mostly larger firms-had been in existence since 1970. IMPACT ON ARCHITECTS The dynamic of architecture firm structure during downturns-most firms reducing staff, some firms disappearing, and new firms starting up-is even more dramatic for architecture staff positions. The AIA estimates that there were almost 110,000 architecture positions nationally (licensed and unlicensed graduates) in 2003 at the end of the construction downturn following the 2001 economic re cession, growing to almost 130,000 positions at the peak of the construction expansion in 2007-2008, and then falling to almost 90,000 at the low point of the construction cycle following the 2008-2009 national economic recession. These figures suggest very rapid growth in the number of architecture positions during construction expansions and very s teep losses during downturns. During the mid-decade upturn, the AIA estimates that there were over 20,000 architectural positions added nationally, generating close to a 20 percent increase in architectural positions. During the construction downturn following the Great Recession, however, between 35,000 and 40,000 payroll architecture positions were eliminated (Figure 7.10). FIGURE 7.10 During Upturns, There is Sufficient Architecture Staff; During FIGURE 7.11 Younger Architectural Staff Are Most Likely To Be Added and Eliminated Downturns, an Excess During Cycles While recent cycles have been more extreme, even normal cycles overwhelm the ability of the profession to adjust to changes in workloads. During upturns, there generally are not enough recent graduates of architecture programs to meet the growing staffing needs. Some firms outsource design work in an effort to meet project deadlines. Other firms may provide incentives to keep staff in the workforce, including older staff who may have been considering retirement. During downturns, in addition to staff layoffs, firms may freeze or even reduce compensation, furlough employees through unpaid time off, or convert some full-time employees to part-time status. Firms may convert some payroll employees to contract status, so that they only work when there is billable project activity. Historically, less-experienced architecture staff has disproportionately served as a balance wheel during periods of expansion as well as downsizing. These are the positions that may be easier and more affordable to fill during upturns, and candidates may be easier to train in the firm’s area of specialization. They also may have more current technical skills to operate the newest design software. Week 01 Prelims Page 7 of 8 AR 542: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 2 PRELIMINARY LECTURE HANDOUTS By the same token, less-experienced staff has often been the first to get laid off during business downturns. More-experienced staff may have more ability to generate new project revenue during lean times. Also, experienced staff is likely to be more familiar with firm operations, and therefore more difficult to replace during the next upturn. A survey of architecture firms conducted by the AIA in early 2009 demonstrates the volatility of less-experienced positions at architecture firms. This survey was conducted during the heart of the downturn, and asked firms about positions that they would be adding or eliminating over the coming year. Many firms were expecting to reduce their staff size during the year, and less-experienced architectural positions (4-6 years) and interns were the most commonly selected as targets for downsizing. However, a few firms were planning on adding staff that year, and again the positions most commonly mentioned for addition were less-experienced staff and interns (Figure 7.11). CONCLUSION Economic cycles dramatically influence the financial condition of architecture firms and the staff employed by them. However, the ultimate health of the industry will be determined by the underlying growth of the construction industry, rather than merely how design activity cycles around that underlying growth trend. Here the outlook is more positive. According to information from McGra w-Hill Construction, the U.S. construction industry has added an average of 1.3 billion square feet of nonresidential building per year since 1980. Current construction levels in 2010 and 2011 were less than half this pace, so the prospects for strong growth in the years ahead- even during cyclical downturns-are very promising. Week 01 Prelims Page 8 of 8