As we look into 2024, several opportunities and challenges lie ahead for the architecture and engineering (A&E) industry. The January Architecture Billings Index (ABI) reported a score of 46.2, a continued decline for the past several months and indicating decreasing business conditions.
Further, the industry has experienced significant operating challenges over the past three years, including amplified labor challenges, constraints in the supply chain, changes in the types of projects, and funding being delivered. Given the current operating environment, companies want to leverage technology and explore artificial intelligence to gain efficiencies.
Firm outlooks could vary depending on their sector or geographic market. But with a modest increase in spending for engineering and construction anticipated in 2024, the professionals at FORVIS recommend being innovative, flexible, and adaptable as we navigate this year. Here are a few hot topics to keep in mind.
Tax Credits & Incentives
The industry is closely monitoring the progress of the Tax Relief for American Families and Workers Act of 2024, which the House passed in January and was in the Senate at the time of this article’s publication. If passed, the legislation could significantly relieve businesses’ bottom-line financials. The American Institute of Architects (AIA) contends the proposal would aid architect and design professionals by:
- Restoring the ability of taxpayers to immediately deduct research and experimental costs paid or incurred from 2021–2025 instead of requiring that they be deducted over a five-year period.
- Reinstituting the 12.5% Low-Income Housing Tax Credit (LIHTC) ceiling for calendar years 2023–2025.
- Lowering the tax-exempt bond financing requirement and allowing more buildings to receive the LIHTC.1
In addition, the research and development costs amortization tax change has been a priority for the American Council of Engineering Companies’ (ACEC) advocacy efforts due to its significant negative impact on the engineering industry.
For more details on the proposal, see “Tax Relief Proposal Text Now Released.” Our tax professionals are continuing to follow this and other legislation. Visit our website to keep up with tax changes that may affect your business.
Cybersecurity & CMMC Compliance
Government contractor firms should be aware of the proposed Cybersecurity Maturity Model Certification (CMMC) rule, which would introduce sweeping changes to how contractors comply with requirements to protect Controlled Unclassified Information. A final rule can be expected in late 2024 or early 2025 based on the anticipated comment review period. For more information, view our webinar, “The Proposed CMMC Rule Is Here: What It Means for Your Organization.”
FORVIS was the sixth authorized CMMC Third-Party Assessment Organization (C3PAO) and has been a national leader in CMMC readiness consulting and voluntary NIST 800-171 assessments under the U.S. Department of Defense’s Joint Surveillance Voluntary Assessment (JSVA) Program. Our team has significant experience helping contractors of various sizes in a multitude of industries with gap assessments, compliance program development, policy development, project management, and JSVA assessments.
Cybersecurity remains a vital concern even for A&E firms that are not government contractors. If you need help strengthening your security, see how our cyber team can assist.
M&A Trends
Businesses considering succession plans should be aware of the mergers and acquisitions (M&A) activity for A&E. During 2023, M&A deals for the A&E industry experienced an 11.2% decrease last year after a record 481 transactions in 2022 but remained well above long-term historical levels.2 This was the third year in history where the U.S. surpassed 400 transactions, despite sharply rising interest rates. Private equity, in particular, has made great strides, going from 5% to 40% of all activity in the A&E space within the past decade.
In addition, the appetite for deals with larger firms continues to grow, with the median revenue of the acquirer reaching $96 million last year compared to $69 million in 2022. However, the median seller reported revenue of approximately $3 million, a slight decrease from 2022.
At FORVIS, our dedicated transaction advisory professionals can help identify the opportunities and challenges you could encounter in your transaction and provide meaningful insights. Whether you’re a private equity-backed company or an employee-owned corporation, our due diligence can help you better execute the deal.
Understanding ESG
There is a growing trend of organizations pursuing sustainable practices, driven by a desire for long-term value and positive impacts on stakeholders. Salient environmental, social, and governance (ESG)-related trends include increasing transparency, reputation as a strategic asset, and the workforce’s growing interest in organizational values.
Recent legislation mandates GHG emissions reporting and climate-related financial risk disclosure impacting both public and private entities over $1 billion in revenue doing business in California.
If you are interested in learning more, the ESG & Climate Risk team at FORVIS is prepared to assist you in navigating these evolving reporting requirements.
How FORVIS Can Help
If your firm is tackling issues related to tax, cybersecurity, or succession planning, our A&E and related professional services team can assist with those and more. We have the training and experience to aid you with internal accounting procedures, financial reports, tax planning, and tailored consulting support. Please reach out to one of our professionals with any questions.