by AIA Chief Economist Kermit Baker, PhD, Hon. AIA, and Economics and Market Research Director Diego Saltes

The U.S. construction industry is one of the largest sectors of our economy. Construction contract values alone totaled more than $525 billion in 2003 with over half coming from the residential sector, almost 30 percent from nonresidential buildings, and the remainder from nonbuilding activity (streets, bridges, etc.).

Although a large segment for the overall economy, construction is also a very volatile sector. When the economy is strong, most types of construction activity accelerate faster than the broader economy. Likewise, when the economy is weak, most types of construction activity decline faster than the overall economy. Forecasting a volatile industry like construction, therefore, can be particularly challenging where a considerable premium is placed on accurately identifying turning points.

The AIA Work-on-the-Boards survey and the Architectural Billings Index
Beginning in late 1995, the AIA assembled a panel of architecture firms to participate in an ongoing national survey of business conditions at architecture firms. This effort, known as the AIA Work-on-the-Boards (W-o-t-B) survey, generates monthly readings from firms on changes in their business conditions. Architects are well positioned to report on the direction of the construction industry. Although decisions to build a structure are made by millions of homeowners, businesspeople, nonprofit institutions, and government agencies, the first comprehensive indication of planned development typically shows up on an architect’s drafting board. About 75 percent of nonresidential buildings (including multifamily housing) are designed by architects, as are about 25 percent of single-family homes. A greater share of nonresidential activity is reviewed and approved by architects, but without complete design involvement.

Relationship of the ABI to construction activity
Since architecture firms design the overwhelming majority of buildings in the U.S., we would expect a relatively consistent relationship between architectural design activities and 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. In commercial/industrial projects, for example, for almost 40 percent of projects, the design phase up through contract award was less than six months, while for more than a quarter 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 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 relationship between billings at architecture firms and nonresidential construction activity is evident when both series are graphed. As can be seen in the accompanying graphic, construction activity moved in tandem with the Architectural Billings Index (ABI) once the ABI is shifted forward 13 months. Beginning in 2000, the construction sector experienced a notable downturn, which reached a bottom in the summer of 2002 with an annual decline of 19 percent. Earlier that year the ABI was running below 50, which corresponded to a decline in overall architecture billings. As the construction sector started to recover throughout the remainder of 2002 and beyond, so did ABI, leading up to a growth phase that started in 2004.

Other indices created from the W-o-t-B business survey
The national ABI reports the billings activity of architecture firms for all firms participating in the W-o-t-B panel. Additionally, several specialized indices are created to measure business conditions among key subsets of firms.

The sectoral indices report business conditions at firms based on their building type specialization. Firms report their distribution of billings by three major building categories: residential (single-family and multifamily); commercial/industrial (e.g., stores, offices, hotels, garages, manufacturing, and warehouses); and institutional (education, dormitories, health facilities, religious, amusement, public buildings, and miscellaneous). If more than a half of a firm’s billings are from one of these building sectors, the firm is classified as specializing in that sector. The institutional billings sub-index, for example, is composed of firms where a majority of billings comes from this sector.

The regional indices report business conditions at firms based on their location. The four regional indices correspond to the U.S. Census regions. Activity at a firm is assigned to its region regardless of the location of a project.

Using the ABI
Architecture firms have long used the ABI as a means of monitoring and evaluating business trends. For most architecture firms, it is difficult to distinguish between a change in their business conditions generated by their own activities (e.g., a successful marketing strategy) as compared to a general upturn or downturn in the demand for design services. The ABI helps them to monitor market-wide trends and compare them with business trends at their firm.

For businesses working in the construction sector or in businesses that generate a significant share of their activity from construction-related activities, the ABI has other valuable applications. Since the ABI anticipates upcoming changes in construction activity by several months, it is a leading indicator of the construction sector; it provides accurate information on future changes in construction activity, and the regional and sectoral sub-indices provide the same early warning at the regional or construction-sector level.

Of particular value is the ability of the ABI to identify “turning points” in the construction sector. Turning points—which indicate when negative market conditions begin to turn positive or when positive market conditions begin to turn negative—are of primary importance for business planning. Their early identification can allow businesses to prepare for an upturn before the upturn actually materializes, or scale back for a downturn before weaker market conditions take their toll.

Businesses can also customize the information contained in the ABI to their own needs. Whereas the ABI is benchmarked to the average time between design and construction, many businesses provide products or services to the industry that fall early or late in the construction process. A company producing concrete additives, for example, would likely see changes in their business conditions closer to the time when there was a change in design activity. On the other hand, a producer of interior design products for the nonresidential sector would likely see changes well after the average time of many others serving this industry. Thus, the ABI historical database allows the computation of individual relationships, rather than a single average for the entire industry.

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